Monday August 2, 2021
How Much Will You Need to Save for Retirement?
Is there an easy way to figure out how much I will need to save for retirement? My spouse and I are both in our late fifties and want to figure out about how much we will need to retire comfortably.
How much money you need to retire comfortably is a great question all adults should ask themselves. Unfortunately, far too few are thinking about it.
Calculating an approximate amount to save for retirement is easy and does not take long to do. It is a simple, three-step process that includes estimating your future living expenses, tallying up your retirement income and calculating the difference.
Estimate Living Expenses
The first step is estimating your future retirement living expenses, which is often the most difficult step. If you want a quick ballpark estimate, figure around 75% to 85% of your current gross income. That is what most people find they need to maintain their current lifestyle in retirement.
If you want a more precise estimate, track your current living expenses on a worksheet and deduct any costs you expect to go away or decline when you retire, and add in new anticipated costs.
Costs you can scratch off your list include work-related expenses like commuting or lunches out, as well as the amount you are saving for retirement. You may also be able to deduct your mortgage if you expect to have it paid off by retirement, and any child’s college expenses. Your income taxes may be reduced.
On the other hand, some costs will probably increase when you retire, like health care. Depending on your interests you may spend more on travel, golf or other hobbies. If you are going to be retired for 20 or 30 years you should factor in some occasional big budget items like a new roof, heating/air conditioning system or vehicle.
Tally Retirement Income
Step two is to calculate your retirement income. If you or your spouse contribute to Social Security, go to SSA.gov/MyAccount/ to get your personalized statement. The statement estimates what your retirement benefits will be at age 62, full retirement age and when you turn 70.
In addition to Social Security, you or your spouse may have income from a traditional pension plan from an employer. Contact the plan administrator to find out how much you are likely to receive when you retire. Add in any other income from other sources you expect to have, such as rental properties, part-time work or investments.
Calculate the Difference
The final step is to do the calculations. Subtract your annual living expenses from your annual retirement income. If your income alone can cover your bills, you will be in a good position for retirement. If not, you may need to tap into your savings, including your 401(k) plans, IRAs or other investments to make up the difference, or adjust your budget.
For example, if you need around $60,000 a year to meet your living and retirement expenses and pay taxes, and you and your spouse expect to receive $35,000 a year from Social Security and other income. That leaves a $25,000 shortfall that you will need to pull from your nest egg each year ($60,000 – $35,000 = $25,000).
Depending on what age you want to retire, you need to multiply your shortfall by at least 25 if you want to retire at 60, 20 to retire at 65 and 17 to retire at 70 – that would equate to $625,000, $500,000 and $425,000, respectively.
Why 25, 20 and 17? Because that would allow you to pull 4% a year from your savings, which is a safe withdrawal strategy. In most cases, this allows your money to last for your lifetime.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.
Published May 21, 2021
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